Q3 2022 Innovative Solutions and Support Inc Earnings Call
Okay.
Good morning, and they'll come to the innovative solutions and support third quarter 2022 earnings conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star followed by zero. After today's presentation, there will be opportunity to ask questions.
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I would now like to turn the call over to assure them Escobar. Please go ahead.
Good morning. This is Sharon Oscar <unk>, Chief Executive officer of innovative solutions and support.
Welcome to our conference call to discuss our performance for the third quarter of fiscal 'twenty to 'twenty two.
Our business transition.
The outlook for coming years.
Joining me is Mike <unk>.
Our new CFO , who joined US in July upon <unk> retirement.
We are excited to welcome Mike <unk>.
Yes.
Not only has extensive financial experience in a manufacturing environment, what you're also.
That's a strong track record of driving results.
Before we begin I'd like.
Mike.
To read the Safe Harbor statement.
Thank you Sharon and good morning, everyone.
I would remind our listeners that certain matters discussed in the conference call today, including new products and operational and financial results for future periods.
And forward looking statements that are subject to risks and uncertainties that could cause actual results to differ materially.
They are better or worse from those discussed including other risks and uncertainties reflected in our company's 10-K, which is on file with the SEC and other public filings.
I'll turn the call back to Sean.
Thank you Mike.
In the third quarter, we continued our steady growth with revenues up 12% and operating income up 41% ending the quarter with over $14 million of cash and no debt.
Okay.
First half this is one of the first nine months in many years.
The business continues to deliver attractive returns and generate significant free cash flow as we grow revenues and generate operating leverage.
Although I have stated before our winning formula starts with excellent product.
Attractive growing markets, including our award winning auto throttle I don't know.
Flat panel display for cargo conversions.
We have delivered over 500 cockpit upgrades and 70 57767 737 platforms.
We are now rapidly growing our presence in general aviation.
And I'll answer it.
That's always been a valuable partner to our military as well as other militaries around the world.
Continue to receive orders on our military products.
As this installed base growth it creates opportunities in adjacent markets. While also delivering a steady demand for customer service, which is now running at approximately $1 million per quarter.
On the price performance basis, we remain an industry leader.
The business continues to be well balanced not only between the commercial air Transport General aviation and military markets, but also between the OEM and retrofit markets.
I was a part, though yes and general aviation markets are currently in a growth mode.
In the case of one of our Oems have placed orders for deliveries further into the future that normal.
To secure their supply chain and meet their own delivery commitments.
On the retrofit side, we continue receiving orders on the air cargo platforms from various airlines internationally as well as domestically.
This diverse mix of business provides a solid foundation for growth.
From this space, we add other features and capabilities to our existing base.
Well, it's been not just come from new products, but also from a more aggressive sales and marketing effort.
This quarter saw an increase in our business development expenses, which we anticipate would increase huge sales.
As we continue executing on our organic growth strategy while at.
Beginning to consider additional growth by acquiring similar product lines, which would utilize our existing infrastructure.
Last quarter I spoke about and anticipate that certification from the FAA to introduce a product and installation of service for our team get and PC 12 customers.
I'm pleased to report that we have received our escalation approval certificate and have performed to installation of approvals.
We're also broadening our product market potential by developing new auto throttle technology.
Not just other variations of the king get but other aircraft platforms in both commercial and military markets.
As you are ramping up our sales and marketing activities post pandemic. We are attending more trade shows meeting face to face with customers and performing more customer flight, resulting in an increased backlog compared to March 31st.
Let me just quickly touch on the impact of some of macro.
Economic factors.
We are battling inflation supply chain challenges and labor availability.
On the contract side, we are protected by cost escalators that enable us to pass along some price increases during periods of inflation.
The supply chain side, you have added safety stock inventory.
In some cases at a premium.
There are also parceling the widely reported shortage of skip technical professionals.
Despite the challenges our turnover has been very manageable and we have been able to bring on new highly qualified engineers and other skilled labor to support our growth.
Now I'd like to turn it over to Mike to review our financials in more detail.
Thank you Charles.
Thank you all for joining us this morning.
So I'm very pleased to have joined innovative solutions and support I'm looking forward to working with Shahram provide the investment community with the continued outstanding disclosure and transparency for which the company is already known.
Turning to the results for the third quarter revenues were $6 9 million up 12% from $6 two a year ago.
Growth was primarily attributable to continued strength in our sales of flat panel displays for retrofit.
Programs for commercial to commercial air transport customers as well as auto throttle sales to the general aviation market, especially palatis under the company's PC 24 contract.
Strong and plot both reports strong demand in their general aviation business, both of which we support with our auto throttle.
In addition, we have a third OEM production contract with Boeing for the KC 46, eight which also continues to generate steady revenue.
Finally, we generated over $1 $3 million and customer service revenues this quarter as a result of drawing portfolio of installed <unk> products.
Total new sales in the quarter were approximately $12 million.
So that we ended the quarter with a backlog of $12 6 million up from $7 6 million at the end of the last quarter.
Third quarter orders include a large contract with one of our general aviation Oems that is looking locking in their supply chain beyond their normal advanced border.
Note that all of our long term OEM production contracts include escalator clauses that provide for the passing along of any cost increases incurred as a result of inflationary pressures.
Gross margins for the last quarter were 58, 5% up from 54, 3% in a quarter a year ago.
Increase in margins is attributable to favorable leveraging of fixed cost, resulting from the increased sales and production volume.
Lower employee head count and a favorable product mix.
Our model produces attractive margins as we scale the business.
Total operating expenses for the third quarter of fiscal 2022 were $2 $4 million up from $2 2 million in the same quarter a year ago.
The increase reflects an increase in professional fees and business development.
The increase in business development expenses as a result of ramping up sales and marketing efforts post pandemic as mentioned by sharp.
We are more frequently traveling to customer locations and prospect sites as well as making additional in person marketing appearances at aviation trade shows.
Research and development was essentially in line with a year ago as we continue to target, 10% to 12% of revenue for R&D.
Net income for the quarter was $1 $4 million or <unk> <unk> per share compared to $2 $7 million or <unk> 16 per share a year ago, which included a $1 $5 million tax benefit.
For the third quarter of 2022, we recorded $359000 in taxes, where in a year ago, we had a $1 $5 million tax benefit due to the reversal of a deferred tax asset valuation allowance.
Operating income of $1 $7 million was up 41% from our $1 2 million a year ago.
Due to this tax anomaly, we believe the comparison of operating income better represents our improved performance this quarter.
We anticipate a 21% tax rate for the year.
The company remains in a strong financial position, we generated $3 million of operating cash in the third quarter and $6 4 million over the first nine months of fiscal year 2022.
At quarter end June 30, we had $14 $5 million of cash on hand, as principally as previously discussed the company anticipates that due to the ongoing supply chain issues and challenges as a result of COVID-19 pandemic.
We will continue to maintain a slightly higher than normal level of inventory as an added measure of precaution.
Company's debt free we believe that the company has sufficient cash to fund operations in the foreseeable future.
I'd like to turn it back to Charles for some closing remarks.
Thank you Mike.
The first nine months of 2022 are amongst the best in the company's history.
And markets are firming at the global economy is opening up.
A foundation of long term OEM contracts.
Large global aircraft manufacturers are experiencing rising demand.
Flat panel display continue to offer a compelling value proposition in the aftermarket.
The company continues to generate strong cash flow and has a solid balance sheet that provide us.
The resources to invest in growth opportunities in the market once again expanding.
These are exciting times and we appreciate your continued support and encouragement.
We will now open the floor for questions.
Thank you at this time, we will open a quick question.
If you would like to ask a question you May press Jordan one on your telephone keypad.
If you are using a speakerphone please pick up your handset.
Please go ahead, Sir Thank you Keith.
Before taking the first question, we will be posting momentarily.
Yes.
Our first question comes from John Moran with everybody and co. Please go ahead.
Hi, Thanks for taking my question is can you elaborate at all on the large order that you received that.
You cited being responsible for that large increase in the backlog and new orders.
For example, what the delivery period would be for that.
Or even how large it was.
Yeah.
I mean that came from one of our OEM programs.
Well, we typically get maybe.
Six months ahead of others.
And they kind of get it.
<unk>.
Closer to two one yet not quite.
Yes.
But further out than normal.
And in that kind of gave us a good good.
Paul.
Can you say whether the.
Sort of the core business was.
It was up flat down.
Outside of that order.
Sure.
It was in line.
Please.
Our quarterly orders that we received.
Hey, Dan from quarter to quarter it varies.
If you followed the.
Backlog.
The order is.
Timing of them.
Yeah.
And this was.
Nothing unusual other than the kind of extra orders that are received.
It was from one.
Cuts in that non OEM contract.
For the quarter.
From a sales perspective.
As mentioned <unk>.
<unk>.
Retrofits in our air cargo.
That was up quite a bit that that kind of drove the increase.
On a comparative quarterly basis.
Okay. Thank you very much.
Yes.
Thanks again, you May Press Star then one if you would like to ask quick question.
Our next question comes from Michael Weiser with advisor Partners. Please go ahead.
Good morning, gentlemen.
Steve.
With more than $14 million in cash on the balance sheet.
I'm wondering if you could give us some understanding.
On an ongoing basis, you think you need.
And cash on the balance sheet to continue running the enterprise.
Certainly speak for other shareholders, who are interested in.
<unk> continues to be interested in dividends that.
The company has issued in the past and would like to see again going forward and so would you. Please help us set our expectations.
How much cash you feel you'd need.
On an ongoing basis. Thank you.
So historically the company has been sitting.
<unk> about $40 million tax.
We're nowhere near those.
Numbers.
But currently I'm not aware of any any plan.
For eminent plan for dividend.
Obviously, it's a board decision.
As the holiday would do that but I'm not aware of any at the moment.
Could you comment please.
On.
What you feel your ongoing cash need is.
Yes.
Our Florida operation.
We like to have.
Less than $5 million.
Very little.
Yes.
We're at a run rate now were generating about $2 million in cash every quarter and from an operational standpoint.
Rob.
302 to.
Shar mentioned $2 million to $5 million is plenty to support our operations.
Okay.
And the balance of the cash is being used for what purpose.
The balance of the cash is there.
For us for us to do investments.
In the.
And the growth of the company.
Well I appreciate the.
Sentiment that you express.
Right.
Difference between the cash on the balance sheet and what you say you need to run the enterprise and ongoing basis.
Considerable margin for an entity, that's generating something on the order of 30 million LNG themselves. So.
I'm sure the board to.
It takes those things into consideration.
Okay.
Well.
Sure.
Really.
That decision as to whether they would be giving dividends.
Not all of our.
General there.
Are looking to to get dividend some of them would like to see it.
Investment in technology.
Thank you.
Yeah.
Your next question comes from David Campbell Thompson Davis <unk> Company. Please go ahead.
Okay.
Thank you very much.
We are taking my questions.
Mike.
Congratulations on your new.
Morning, Matt.
Hey, Steve.
Okay.
Looking forward to data in the future.
Thank you.
I wanted to ask about the balance sheet.
Hey.
There's an asset on the balance sheet at the end of June for $1 million.
<unk> hundred 58.
Assets held for sale.
These are these are these.
These are the components.
The.
You're talking to that where are they.
Kind of similar.
Wanted to is trying to.
Fixes.
Is it expenses.
Now this is.
This is an airplane that we have that we are selling.
That's the King Air.
The King Air PC 12.
Aircraft that's.
And as far South yes, yes.
Yes, I know, Jeff, Jeff liked that plane, but he's not here anymore.
So that switches so that will be.
Yes.
Presumably.
Capital gain on.
And whenever you sell it.
That'll be a fourth quarter event when the sale is finalized.
Okay. So it could be in the fourth quarter.
Yes could be.
This is more cash coming into the company.
Yes.
And you mentioned.
You didn't mention and eventually spread.
You mentioned on the call.
Because a significant amount of.
The.
New business came from.
Country cargo conversions.
So clearly there then versions where a significant.
Part of the increase in revenues.
Yes, I would say that along with.
Steady and increased demand from our existing OEM customers.
Buying our auto title as well.
Right right right.
Yeah.
Sure.
So.
Why is it that.
The backlog is only reflects orders received.
<unk>.
But say for example that doesn't include any.
Any backlog.
The backlogs for.
Cargo conversions.
That's not included in the backlog.
Yes. The backlog includes all the all the purchase orders that we have in hand at the moment.
As mentioned in our R. R.
Our backlog typically is for a few months to six months, but.
Now it includes.
Orders from one of our OEM customers for a longer period of time and almost up to a year.
Hum.
What does it.
Is the backlog increase in backlog reflect.
The potential inquiries in revenues or because of the.
Timing of the backlog is.
It doesn't doesn't it doesn't imply more revenues.
I would say not necessarily.
It's.
Now just based on when we received the purchase orders at a given point in time.
Alright.
Alright.
Okay.
And.
I would tell you there is no engineering and.
Development revenues this year like there was last year.
And in the last quarter.
Is that is that something unpredictable.
Again.
Okay quarter in that in the next quarter.
Given the timing of that.
There's two parts to it.
When we book it and then.
The completion is done so we can recognize the revenue.
Alright.
Sure.
But retail we do continue.
Kidding.
Kind of engineering services.
Orders.
In a steady.
34.
Okay.
Can you tell us any more about.
What you're looking for you mentioned that you may.
Is it looking for acquisitions of products new.
New products.
Include in your.
<unk> had good sales.
Sales.
It was what does that mean.
And these are by by new aerospace products or what.
We've done this in the past.
Zack why for example, the GPS technology acquired flight management system technology.
And we continue looking for.
For opportunities.
The way the the way the industry is going on right now.
There is there is a law.
A lot of consolidation happening at <unk>.
A larger organization.
They do acquisitions of.
Of companies.
Sometimes there are product lines within that acquisition that doesn't fall in line with the strategic plan.
And those.
It will become targets for divestiture.
So we are kind of reviewing some of those opportunities to see if their product.
Within our.
Within our strength.
Although organization for amount of planetary.
We could leverage to grow our base.
So we are spending.
More time than we did in the past reviewing those kind of opportunities.
These products will be.
Go ahead of.
That are comparable to what you already produce exactly yes.
We opened a new contract for us with Oems.
Again, it's.
We are not.
Trigger happy here to go buy something.
But what we are looking.
Yes.
How did the satisfy that.
Yes.
Sustained growth gross profit margins.
On these products.
Okay.
Yes, the incomparable lets you already produced.
Absolutely.
Okay.
Well you did.
As an excellent quarter.
Yes excellent quarter.
And I suspect that.
And the <unk> date.
September quarter, we will also the good one.
Helped by the backlog to some extent.
But also their sales.
Sales.
Do you have any comments on what to expect in the fourth quarter.
You're not really able to do that.
Okay.
Okay great.
We don't give forward looking comments.
Okay.
Thank you very much for your help.
I'll be in touch.
Thank you very much.
The next question comes from Craig Ellis with B P. M. Please go ahead.
Hey, guys.
One clarification.
The PC 12, as what's being held for sale is that correct.
Okay.
The other thing is you mentioned you were looking to expand the auto throttle into commercial and military.
Could you explain how the development of that would work.
Who would pay for it.
Okay.
So.
That's part of our own internal R&D.
Pat.
We've been supporting.
There is an ongoing.
Engineering activities.
The conference.
Expanding the oral drug was being held for sale.
We are seeing interest from.
From from some of the myths.
Mitch.
Great.
As well as some others.
<unk> platform.
I'll bet.
They see would pay for it.
They see that the oral.
Ill provide additional takeaway.
Right.
And.
We are developing some of those product lines.
Some of them are actually.
It says on the tin get for the <unk> platform.
<unk> of them are looking at other plants.
Yes.
Tom.
Okay.
Also some time last year I believe the clips aviation was purchased from bankruptcy does that offer opportunity for us at any point in the future.
Okay.
Compensation.
I'm not 100% sure.
Well, that's going to go with that with that platform.
We work closely with them to support them, where they need where they.
Need help.
But they've got challenges.
At.
All right.
Good starting up production engine challenges.
Our that caused challenges.
But but but.
Once they get there.
<unk>.
Once they are there.
Getting portfolio what are they going to go.
We're there to support them and we've got it.
Our relationship with them.
But nothing nothing.
Sure.
Yes.
Okay. Thank you that's all from me guys. Thank you very much. Thank you Kurt.
Our next question is a follow up from John Morris with <unk>. Please go ahead.
Yeah, Hi, could you just remind us.
Based on the company's existing facilities.
And personnel et cetera, how large of a business can this be.
So from like from from organic growth I mean, it seems to me you at one point when you hear the other products and it was quite a different business that you were <unk>.
For example, generating $60 million in revenue or whatever I know that that wouldn't be comparable to.
The business that you guys have today, but could you speak to that.
Sure.
Facility is as you know if you go back.
Few yes, we have.
<unk> has over $60 million a year.
Revenue coming out of here, we've got all the capabilities in house to do that.
All the machinery all the capabilities here.
So so that's one area, where we're very.
You would look at.
If you do product acquisitions, which are of the right.
Mix that we could.
Grow revenues that way, we have the capabilities here without any.
Significant investment in infrastructure.
So that.
Finally, if we could find the right product mix.
What makes it attractive.
I would like I said.
Now I would like to go to actually on by itself.
You got to find them.
Got.
Evaluate them and make sure it is the right product.
From a from a from a personnel standpoint.
Our cost of.
Direct labor.
Is less than 5% of our sale price.
So it doesn't take a lot of direct labor increase.
Two to grow the revenue designed the company has been designed in such a way that allow us to do that.
Without getting too much Brian .
Although discussions on the auto throttle mill.
Military customers.
On aircrafts.
We're not yet certified.
Some of them are and as I mentioned some of them are on the PC 12, and the King.
Platforms.
But some.
That or not.
Some leather or not because there is I mean.
There is a fair amount of that.
Spending in the military side on new platforms.
And.
Some of those new platforms still use the PC six several of <unk> yet.
Each app.
Yes.
Limitations of protection.
And so year on our overall has a good home windows.
Also some of the new feature exactly developing lend themselves to the way the ministry operate some of these aircrafts.
Have you or have you had a large fleet order yet for auto throttle.
Large fleet or the on the aftermarket.
Yes.
Not not.
Larger.
I'd like it to be but we've had like half a dozen orders.
That kind of size over there.
There are not that many large fleet.
<unk>.
Business Aviation aircraft is not like air transport.
Somebody's got hundreds of exactly.
So a lot of the amount of smaller fleet.
Okay.
Our next question comes from Michael Friedrich.
Private and MS. Cheng. Please go ahead.
Hi, Good morning, Yeah, just as a follow up on the.
The last few calls theres been a few different.
Right.
Approaches on how the.
You were going to try to market to the <unk> to the aftermarket for the auto throttle.
Where are things at that right now because it almost appears from the tone of this call bad.
The retrofit market on auto probably being a little bit I don't want say deemphasize, but back Brian compared to some of the other initiatives right now.
Where do we stand on that.
I know you guys were going to be maybe hiring a team that would go into different places and actually globally.
Just what's the most recent approach here.
Alright.
We continue putting an effort into.
Into the sales the marketing of your withdrawal.
We believe that this product has potential in the market.
In our industry market acceptability.
Is that an overnight thing.
And this takes time.
Okay.
Don't have much competition.
In the platforms that we provide the oracle with.
We have the Oems approval.
We're seeing increased military interest in that.
We will continue.
I'd say.
Sales and marketing efforts.
And.
C C.
See that is that it.
Hey.
Another step.
That is a source of revenue for us.
So look on the 567 platforms.
Yes, before we get to a point.
Or you're just sitting there on getting orders on it.
Because you know.
In that market for your product.
And the other one.
We will get that.
Okay. Thank you.
This concludes our question and answer session.
She has also now concluded. Thank you for attending today's presentation. You may now disconnect and have a good day.
Okay.